Personal Finance in the 21st Century

Category Archives: Real Estate Investing

Property can be divided into residential real estate and commercial real estate. Residential property includes houses, condominiums and other units where people live. Like the name implies, it is real estate for residential purposes. Commercial property on the other hand is real estate used for commercial purposes.

Commercial real estate spans a wide range of properties. Office buildings, shopping malls, restaurants, hotels and warehouses are common examples of commercial real estate. Apartment buildings with more than four units are also classified as commercial property.

Most people think that residential real estate investing is relatively straight forward while commercial real estate investing is difficult and requires a lot of money. To some extent this is true but investing in commercial real estate does not always require a lot of money.

There are a lot of differences between residential and commercial real estate investing. Compared to residential real estate investing, commercial property has a number of advantages. Just to mention some of the advantages:
– Longer Lease Duration
– The Tenant Pays the Outgoings
– Less Management Overhead
– Less Government Interference
– Contract Terms Are Very Negotiable

But needless to say, commercial property investing has also some drawbacks. The main two problems are lower Loan-To-Value (LTV) and difficulties finding new tenants. Residential real estate values are relatively stable, commercial real estate values are much more volatile. During a recession a lot of companies go bankrupt or downsize which means that the demand for commercial property decreases. That is one reason why banks insist on lower LTVs than for residential property. Demand for residential property is much more stable, also during a recession people need somewhere to live. Since commercial leases are long, it can often be difficult to find a new tenant.

As a commercial real estate investor, it is very important to try to minimize the drawbacks. The low LTV means that you need to come up with a lot of money to close a deal. But since everything is negotiable, a motivated seller may accept to give you a second mortgage or flexible arrangements to help getting the deal through. It is also worth noting that what you pay for the property is not of much interest to the bank, they will estimate its value and lend you according to that estimated value. To be more precise, the value is determined by dividing the net operating income with the cap rate. The value of commercial real estate is dependent on the rent paid by the tenants. This means that if you can find new tenants, the value of the property goes up.

Although commercial properties can cost several millions, you can also invest in much cheaper commercial property. Commercial real estate investing is complex, the wide range of property types makes it almost imperative to focus on just one or two types of commercial real estate.

Investing in apartment buildings is one way of trying to combine the advantages of commercial and residential real estate investing. Your tenants will be the same as in residential property investing, you will just have more of them. Here you can learn more about investing in apartment buildings.

Property prices have gone down in many countries in Europe. But is it really the right time to invest in real estate in Euroland at the moment? The future for many euro countries looks bad, no one knows what will happen. What are the risks with buying a cheap house in the sun?

The property prices in many countries in southern Europe have plunged. Combined with low interest rates, it can look like a once in a life time opportunity to secure a place in the sun. But while property marketers are touting the advantages, most economists are worried about the risks. The countries there property prices have fallen the most are stuck in deep depressions. Nobody knows when things will improve but it certainly looks like it will take time, quite possibly a very long time. This means that property prices in those countries are likely to continue to fall. And then there is the risk that some countries may drop out of the euro. In that case, the new currency would deprecate a lot which for foreign property owners would mean a heavy loss.

Looking at specific countries in Euroland, Spain stands out in many ways. The Spanish property boom was huge but that also meant that once the bubble burst, the problems were huge as well. The Spanish economy is, to put bluntly, a basket case, the unemployment is extremely high. And it will probably get even worse. It is no trouble finding property bargains in Spain, at least compared with the prices before the crash. But as mentioned, the only quick solution for Spain is to leave the euro. It is extremely unlikely that Spain would drop the euro but quite clearly the country needs a weaker currency. It is probably best not to put in a ridiculously low offer on a Spanish house, you could very well end up as the owner! The overhang of unsold properties is enormous. Becoming a landlord in Spain is best avoided at the moment, the high unemployment means that people have trouble paying the rent and the enormous number of empty units makes it tough to find tenants.

Greece and Cyprus have similar problems as Spain. But the future for those two countries is very uncertain, it is best to wait and see. Unlike many other countries in southern Europe, property prices in Italy did not skyrocket before the global financial crises. House prices in Italy have not fallen as much as in many other Mediterranean countries but the writing is on the wall. The Italian economy has been shrinking the last couple of years and while the situation is not as bad as in Spain, the economy is likely to continue downhill for quite some time. Property prices have been falling since 2008 and are likely to keep on going south. Being a landlord in Italy is not easy, rent controls and restrictions are keeping the yields down to 3-4%. If you find your dream house in Italy, it can be a good idea to buy it but don’t expect to make a quick buck. It will take time before house prices start to increase in Italy and there is a risk, albeit extremely small, that Italy may leave the euro as well.

France is a very popular tourist destination and foreigners also buy property in France. The French economy does not have the severe problems as many countries in southern Europe but it has started to get trouble coping with the strong euro. Property prices have begun to fall and the government wants to increase property taxes. Quite a few financial experts think that the economic problems in France have only started, it will just get worse. According to some recent studies, property prices in France are far too high and need fall about 40%. If France gets stuck in a recession, such falls are far from unlikely. But unlike Spain, there is not an enormous amount of unsold properties in France so prices will not collapse. It is also worth noting that closing costs are very high in France.

It is no surprise that the otherwise sleepy German property market has started to heat up. Property prices in Germany have had trouble keeping up with the inflation. But since the global financial crises, prices have started to increase. One reason for this is buyers from southern and eastern Europe. Together with Russians they have started to buy property in Germany, especially in Berlin, Hamburg and Munich. Often without worrying too much about the price, they simply want German property. Why do southern Europeans buy property in Germany? Because they want to protect themselves against economic disasters at home. The only viable solution, but politically impossible, for most southern countries is to leave the Euro. Something that would hit property prices badly in those countries.

So should you buy property in Euroland 2013? Yes, if you find your dream house and you are well aware of the risks. You need to make sure that your finances can survive a financial disaster. It is very unlikely that it will be a good investment in the short-term. Also beware that a lot of people suspect that governments are likely to increase taxes, especially for foreigners who can’t vote them out of office. What about buy-to-let investments in Euroland? Well, the German market is a reasonable option but you need to know what you are doing. Here is more information about buying property in Germany. Only a fool would try to become a landlord in southern Europe at the moment.

While a lot of countries have had painful property bubbles, the German property market has not moved much, neither upwards, nor downwards. But lately, property prices in Germany have started to pick up. Is it a good time to invest in Germany? Here is an overview of the German real estate market.

While property prices in a lot of countries skyrocketed up to the global financial crisis, house prices in Germany did not increase much. But lately, the German real estate market has started to heat up. One reason is that people from southern and eastern Europe are buying property in Germany. For them, it is safer to buy real estate in Germany than in their home countries. If the eurozone breaks up, a new German currency will not lose as much in value as new currencies in southern Europe. For buyers from the east, the German government is much more reliable than the governments in their home countries.

But does it make financial sense to invest in German real estate nowadays? Well, first it is worth mentioning that it is only in some cities that property prices have gone up a lot. In rural areas, house prices have not gone up at all. So far foreign buyers have been focusing on Berlin, Hamburg and Munich. It is also in those cities that prices have increased the most.

Before you start to invest in real estate in Germany, it is well worth remembering that the population in Germany is actually shrinking. Even worse, the population is expected to decrease at least the next 30 years. In 2050 it is estimated that the population of Germany will be 65 millions, compared to today’s 81 millions. Since population growth is one of the main causes of increased property prices, the buyers of German real estate have to rely on other factors.

Like in all other countries, it is wrong talking about the German property market as it was one single market. In reality, there are a lot of different markets, in some places prices go up, in other places prices go down. If you are going to buy an investment property in Germany, it is crucial that you select the right location.

The former East Germany is still struggling and with the exception for Berlin, including Potsdam, the region is supposed to continue to struggle for quite some time. This means that proud cities such as Dresden and Leipzig are best avoided unless you really know what you are doing. Prices have gone up lately, typically about 5% per annum, and it is questionable if the fragile local economies will be able to support much higher prices.

The three largest cities in Germany, Berlin, Hamburg and Munich, have been growing despite that the population in Germany is shrinking. The property prices in the three cities have also been growing quite a lot. Munich has been the most expensive city in Germany for many years but the prices are still going up, albeit a little bit slower. Property in Berlin used to be cheap but in 2009 the market started to take off and prices have increased a lot. The boom in Hamburg started earlier than in Berlin and prices have increased a lot the last ten years. While all three cities offer relatively good capital growth, the rental yield is typically poor. As an investor, you need to tread carefully.

For investors who are looking for reasonable yields, it is best to focus on other cities than Berlin, Hamburg and Munich. There are several cities that are growing but there prices have not increased as much as in the big three. But once again, do your homework, some German cities are struggling and property prices will most likely not increase much more than inflation.

At the moment, cities such as Frankfurt am Main, Cologne, Stuttgart and Ulm are offering reasonable yields combined with relatively good chances of capital gains. But as mentioned earlier, you have to known the local market, otherwise you could easily end up paying too much for the wrong property.

As mentioned, property prices in Germany have increased a fair bit after the global financial crisis. A lot of people see Germany as a safe haven and don’t worry too much about the price. Many German investors are worried that capital gains will be small the next couple of years. But few are worried about a housing bubble, prices are high but still reasonable in most places. It is also worth remembering that German banks don’t lend money as easily as banks in the English-speaking world have done. This together with the shrinking population in Germany makes the German property market quite tricky for investors looking for good opportunities.

Real estate has been one of the best ways of getting rich. But a lot of people have also learnt that it is far from a risk free way of making money. Buying the wrong property or paying too much can get you into big trouble. Here is an introduction to real estate investing.

First we should make clear that with real estate investing we are talking about investing in a property that is rented to a tenant. Your own home is not a real estate investment. It is nothing wrong with owning the place you live in but you should not look at it as an investment.

Real estate investing is divided into residential real estate and commercial real estate. Residential property means single units or duplexes. In the US, the banks classify four units or less as residential real estate, larger properties are commercial real estate. Note that this means that apartment buildings are commercial real estate, if they consist of more than four units.

Most people invest in residential real estate, commercial real estate is often seen as something for the big players. Commercial property investing is difficult and mistakes can be very expensive but it is far from impossible to get started in commercial property investing. And the profits can be very handsome. But residential property is much easier to value than commercial property so it is a good idea to start with residential property before moving on to bigger things.

Why should you invest in property? After all, the stock markets generally generate higher returns, over longer periods of time, than real estate. There are a couple of good reasons to have a relatively large part of your wealth invested in real estate. If you have all your money invested in one single asset class, you are very vulnerable. So diversifying your investments is very prudent. It will not maximize your return in the short term but it will reduce the risk of heavy losses. This means that even if property is a very good investment, having all your wealth in real estate is not advisable.

Even if shares seem to return, on average, a little bit more than 10% per year and property normally significantly less than 10% per year, property is often a superior investment. This is because you generally get a far better return on your money when you invest in property than in shares. This is because of leverage. When you buy shares, you generally use your own money. But when you buy property, you typically pay 10% to 20% out of your own pocket and borrow the rest.

Thanks to OPM, Other People’s Money, property can make you rich. But leverage is a mixed blessing. As long as prices keep on going up, the more leverage, the richer you get. But if the prices go down, too much leverage can kill you financially.

There are some disadvantages with property investments. Sometimes, you need a fair bit of money to get started. If you can’t find a tenant, you have to pay the lender out of your own pocket. Every now and then, something will need to be mended or replaced in the property. Compared with shares, a property investment can be an uncomfortable thing. But there are solutions for most problems, the potential rewards make it well worth the extra hassle.

Buying the first investment property is often a scary experience. It is after all a big transaction and you are generally borrowing a lot of money. But as long as you avoid making big mistakes, it is one of the best ways of building wealth. Here you can learn more about residential real estate investing.